Russia-Cyprus additional protocol to 1998 DTT

The Protocol which was signed on October 7, 2010 between the two countries and which amends the 1998 agreement for the avoidance of double taxation (“DTT”) between Cyprus and Russia is effective from 02 April 2012, further to the ratification from both countries and exchange of relevant notifications through the diplomatic channels.

The provisions of the Protocol are as follows:

(a) Withholding tax rates: the withholding tax rates under the DTT applicable to dividends, interest and royalties remain unchanged (withholding tax on dividends 5% or 10% according to minimum investment rates, 0%  withholding tax on interest and 0% withholding tax on royalties). However, the minimum investment required in order to qualify for the lower rate of 5% on dividends is changed from USD 100,000 to EUR 100,000. This will be enforceable as of January 1, 2013.
 
(b) Capital gains from alienation of property: Article VII of the Protocol, which modified Article 13 of the DTT, will enter into force on January 1, 2017. Until the above mentioned date, gains from the alienation of property will be taxable in the country of residence of the Seller.

As of January 1, 2017 gains derived by a resident of a Contracting State from the alienation of shares or similar rights deriving more than 50% of their value from immovable property situated in the other Contracting State may be taxed in the State where the property is situated.

The following exceptions apply to the new rule and thus the right to tax remains with the country of residence if:

> the disposal qualifies as a corporate reorganization;
> the disposed shares are listed on a recognized stock exchange; or
> the seller is a pension fund, provident fund or the government of either of the two countries.

(c) New definition for dividends

The Protocol clarifies that distributions from mutual funds and similar collective investment vehicles (other than real estate investment trusts or real estate investment  funds or similar vehicles primarily investing in immovable property) will be subject to the normal withholding tax rates applying to dividends i.e. 5%/10%.

The definition of dividends also covers distributions from shares held in the form of Depository Receipts.

(d) New definition for interest

The new definition of “interest” clarifies that the term “interest” also covers income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor’s profits but it does not include penalty charges for late payment or interest which is reclassified as dividends by virtue of other provisions.

(e) Exchange of information

The concept of exchange of information is not a new clause introduced by the Protocol. It has been existing since the 1998 DTT and was fully effective since then. Article IX of the Protocol merely amends Article 26 of the Agreement in order to be in accordance with the relevant article of the OECD Model Treaty.

Since 1998, Article 26 allows the competent authorities of the Contracting States to exchange information which is deemed relevant for the administration or enforcement of domestic laws concerning all types of taxes, insofar as these taxation are not contrary to the DTT.

According to the addition introduced by the Protocol, information may only be released by the Cypriot Tax Authorities if certain information is provided to the Cyprus Director of Taxes (as prescribed by Article 6 of the Assessment and Collection of Taxes Law of the Republic of Cyprus) and also the written consent of the Attorney General of the Republic is obtained. Unless the Attorney General is satisfied  that  all  requirements  of  the  law  have  been  met  and  that  the  request is under all circumstances appropriate, no information will be released. 

The revised Article 26, does not change in any way the existing legal framework and practice followed by the Cyprus tax authorities in relation to the exchange of information obligations arising as a result of the DTT treaty between Cyprus and Russia.

(f) Limitation of treaty benefits

The limitation of benefits introduced does not apply to companies incorporated in Russia or Cyprus.

(g) Other changes

> The Protocol provides that, in cases where a Company is a resident of both Russia and Cyprus, and the effective management cannot be determined, the tax authorities of Russia and Cyprus should consult between them and come to a mutual agreement in this respect.

> The Protocol extends the definition of Permanent Establishment.

> Income from international traffic (ships and aircrafts) will be subject to tax in the country where the effective place of management of the person deriving the income is situated.

> Assistance in Collection: Article X of the Protocol modifies Article 27 of the agreement. The new clause states that the Contracting States shall lend assistance to each other in the collection of revenue-claims. Article X will enter into force upon introduction by the Republic of Cyrus of the necessary legal basis.

Consequences of the ratification of the Protocol:

1. Cyprus will be removed from the  “black list” of the Russian Federation. This will mean that dividends received in Russia from Cypriot sources shall not carry any withholding taxes (assuming the other conditions on the ownership period and equity share in the Cypriot company are met).
2. The changes are towards alignment to OECD policy standards on fiscal transparency and exchange of information on taxation matters.
3. The above mentioned changes ensure the transparency of the Cypriot tax regime and reliability as a financial center.